Summary  of  Preliminary  Report 


Governor  Edward  F.  Dunne 


Investigation  of  Fire  Insurance 


Conditions  and  Rates  in  Illinois 


By  RUFUS  M.  POTTS 
Insurance  Superintendent 


State  of  Illinois 

Insurance  Department 

Springfield 

To  His  Excellency,  Edward  F.  Dunne, 

Governor  of  Illinois. 

Pursuant  to  your  directions,  I have  made  an  investigation 
of  fire  insurance  conditions  in  this  State,  with  especial  atten- 
tion to  rates  and  rate-making  systems;  and  present  herewith 
a summary  of  the  results  obtained,  in  the  form  of  comparative 
tables  of  rates  in  force  Jn  the  States  of  Indiana,  Michigan,  Mis- 
souri, Ohio,  Wisconsin  and  Illinois.  These  show  gross  inequali- 
ties and  overcharges  against  Illinois  citizens  as  compared  with 
other  states.  The  facts  and  figures  given  herein  are  authentic, 
being  taken  from  the  schedules  of  rates  published  for  and  used 
by  the  companies  themselves,  fixing  the  premiums  charged  on 
properties  in  these  states. 

COMPARISON  OF  RATES  IN  CHICAGO  AND  OTHER 


CITY. 

CHICAGO 

Detroit  . . 
Cleveland 
Cincinnati 
Milwaukee 
St.  Louis  . 


State.  Protected  Cities  Outside  Principal  Cities. 

Illinois  30  .35  .35  .40 

Ohio 25  .30  .30  .35 

Missouri .20  .25  .30  .35 


(NOTE — This  report  with  accompanying  exhibits  was  presented  to 
the  Governor  and  made  public  on  May  6,  1914.  The  numerous  requests 
for  copies  have  been  partially  filled  by  typewritten  copies  of  a portion 
of  the  report,  but  the  demand  has  grown  so  great  that  it  is  deemed  wise 
to  priiit,  for  general  distribution,  a summary  of  the  complete  report,  in- 
corporating therein  a digest  of  the  most  important  tables  of  rates  and 
other  data  originally  contained  in  the  exhibits.  This  will  render  acces- 
sible to  all  Illinois  citizens  interested  in  fire  insurance  the  substance  of 
the  information  contained  in  the  complete  report.) 


LARGE  WESTERN  CITIES. 
Annual  Dwelling  Rates. 


CLASS. 

Brick, 
Metal  Roof. 

Brick. 

Shingle  Roof. 

Frame, 
Metal  Roof, 
Detached, 
less  than  25  ft. 

Frame, 
Shingle  Roof, 
Detached, 
less  than  25  ft. 

.1% 

.27 

.30 

.675 

.75 

Detached, 
less  than  10  ft. 

Detached, 
less  than  10  ft. 

. 2 

.20 

.25 

.30 

.35 

. 1 

.20 

.25 

.25 

.30 

.11/2 

.20 

.25 

.25 

.30 

. 1 

.25 

.25 

.35 

.40 

.11/2 

.15 

.15 

.35 

.40 

2 


Omitting  Chicago,  the  average  charge  in  the  large  West- 
ern cities  for  the  brick  dwelling  with  standard  roof  is  20  cents 
annual.  Placing  Chicago  on  this  basis  would  cause  a reduc- 
tion of  about  25  per  cent  in  the  premiums  on  this  class.  Simi- 
larly, the  average  charge  for  the  frame  dwelling  with  shingle 
roof  is  35  cents  annual.  Placing  Chicago  on  this  basis  would 
cause  a reduction  of  about  50  per  cent  in  the  premiums  on  this 
class. 

The  rates  for  Chicago  flats  are  obtained  by  adding  to  the 
brick  dwelling  basis,  10  cents  for  a three  story  flat,  and  20  cents 
for  a four  story  flat.  If  these  differentials  were  retained  in 
connection  with  the  reduced  20  cents  basis,  there  would  be  a 
reduction  in  the  premiums  on  this  class  of  about  22%  per  cent. 

An  even  more  striking  showing  is  made^  by  a comparison 
with  rates  in  force  in  New  York  City,  as  follows: 

DWELLINGS.  FL\TS. 


CHICAGO,  1 yr.. 

ro  Brick, 
Metal  Ro« 

^ Contents 

oi 

o 

o Frame 

Ol 

o 

o Contents 

o 

as 

w's 

eaS 

36 

o Contents 

Ol 

o 

O Frame 

? 

o Contents 

3 yrs. 

. 54 

54 

100-150 

100-150 

72 

80 

100-150 

100-150 

New  York,  1 yr... 

. 10 

16 

16 

20 

15 

20 

20 

24 

3 yrs. . . 

. 25 

40 

40 

50 

CO 

50 

50 

60 

THE  DEAN  SCHEDULE. 

The  Dean  Schedule,  named  after  its  author,  Mr.  A.  P.  Dean, 
is  a detailed  classification  purporting  to  make  rates  proportion- 
ate to  the  fire  hazard  involved,  on  mercantile  establishments, 
factories,  etc.  The  rates  at  present  exacted  from  the  owners 
of  all  buildings  and  contents  of  these  classes  in  Illinois  are  fixed 
by  this  schedule  as  applied  by  the  “Illinois  Inspection  Bureau,’^ 
which  is  described  later.  Dean  Schedule  rates  vary  according 
to  the  basis  tables  which  are  used.  The  schedule  is  constructed 
so  that  the  rates  produced  with  the  100  table  are  twice  those 
produced  with  a 50  table. 


Dean  Schedule  Basis  Tables. 

BRICK.  FRAME. 


be 

'3 

CA 

C 

c 

o 

2 

*3 

C 

£ 

C 

o 

Illinois,  North  

QQ 

60 

o 

70 

PQ 

95 

U 

100 

Illinois,  South 

70 

70 

95 

100 

3 


BRICK.  FRAME. 

“ tc 

c .E 


Ohio,  prior  to  1914 

eo 

. 50 

o 

70 

oa 

90 

95 

Ohio,  1914  

. 50 

60 

80 

^ 80 

Wisconsin  

. 50 

70 

90 

90 

Kansas 

. 60 

70 

95 

95 

Indiana,  Missouri  and  Michigan.., 

.•  60 

70 

95 

95 

It  appears  from  this  tabulation  that  Ohio  and  Wisconsin 
have  the  lowest  rates,  and  Illinois,  the  highest.  The  selection 
of  the  general  basis  tables  for  a state  is  governed  by  two  con- 
siderations, the  existing  level  of  rates  when  the  schedule  is  first 
applied,  and  the  level  of  the  loss  ratio  for  a long  term  of  years. 
There  is  no  reason  for  imposing  the  highest  level  of  rates  on 
Illinois,  except  the  fact  that  there  has  been  no  legislation  in  this 
state  to  interfere  with  extortionate  practices.  The  loss  ratios 
for  33  years  are : 


STATE. 

Illinois  . . 
Indiana  . . 
Michigan 
Missouri  . 
Ohio  .... 
Wisconsin 


Loss  Ratio. 

50.5% 

52.2% 

52.3% 

59.0% 

52.1% 

50.4% 


It  thus  appears  that  Illinois  has  been  the  most  profitable 
state  of  the  group  for  a period  of  33  years,  except  Wisconsin. 
The  volume  of  premiums  in  Illinois  is  equal  to  that  of  Mich- 
igan, Missouri,  and  Indiana,  combined,  and  exceeds  that  of 
Wisconsin  and  Ohio,  combined.  Moreover,  taxation  is  least  in 
Illinois  and  there  are  no  anti-compact,  anti-coinsurance  and 
valued  policy  laws  such  as  prevail  in  the  other  states.  Accord- 
ing to  insurance  logic,  by  reason  of  this  exemption  from  inter- 
ference, the  cost  of  operation  should  be  the  least  in  Illinois,  and 
rates  the  lowest. 


The  rates  in  the  following  tabulation  were  obtained  by  ap- 
plying the  basis  tables,  co-insurance  credits  and  term  conditions 
to  an  example  given  on  page  97a,  of  the  Dean  Schedule. 


4 


Rates  for  Building  and  Contents. 

Five  Story  and  Basement,  Brick,  Wholesale  Dry  Goods. 

BUILDING.  CONTENTS 


Chicago,  Central  Dis.,  Class  1% . . 

1 Year. 

.66 

3 Years. 

2.64 

1 Year. 

1.305 

Chicago,  Outside  Cent.  Dis.,  Class  2. . 

.70 

2.80 

1.25 

Chicago,  average  

.68 

2.72 

1.28 

Cleveland,  Class  1 

.47 

1.41 

.91 

Ohio,  Class  2 

.525 

1.57 

.96 

Milwaukee,  Class  1 

.73 

2.19 

1.24 

Wisconsin,  Class  2 

.525 

1.57 

1.01 

St.  Louis,  Class  II/2 

.59 

1.77 

1.10 

Danville,  111.,  Class  2 

.63 

1.89 

1.13 

Showing  Percentage  Reductions  of  Dean  Schedule  Rates  Neces- 
sary to  Place  Chicago  on  the  Same  Basis  as  the 
Cities  Listed : 


5 yr.  Building. 

1 yr.  Contents. 

Rate  Reduces. 

Rate  Reduces. 

Chicago 

equal 

to  Cleveland 

50% 

30% 

i i 

i i 

“ Ohio,  2d  Class 

44% 

25% 

i i 

C i 

“ Wisconsin,  2d  Class 

44% 

21% 

i 1 

{ ( 

“ Milwaukee,  1st  Class 

20% 

3% 

( ( 

{ c 

“ St.  Louis,  Class  1% 

35% 

14% 

< ( 

i i 

“ Danville,  111.,  2d  Cl. 

30% 

11% 

These  percentages  apply  to  all  rates  made  in  Chicago  by 
the  Dean  Schedule.  At  this  date,  the  Dean  Schedule  has  not 
been  applied  in  Chicago  to  the  outlying  small  risks,  but  the 
rates  in  force  upon  these  risks  are  apparently  on  a line  with 
those  that  would  be  fixed  by  the  Dean  Schedule. 

The  National  Druggists’  Fire  Insurance  Company  reports 
that  about  two-thirds  of  its  Illinois  business  is  placed  in  Chi- 
cago, with  very  little  in  the  down-town  district.  This  company 
uniformly  takes  25  per  cent  off  the  Board  rate  to  fix  its  own 
rate.  The  experience  in  Illinois  on  the  premiums  thus  reduced 
shows  the  original  rates  could  be  reduced  45  per  cent  and  still 
leave  a fair  margin  of  profit. 

The  two  Illinois  companies  which  write  small  retailers  and 
grocers  throughout  Illinois  show  loss  ratios  upon  their  total 
business  since  beginning  of  only  35  per  cent.  This  indicates 
that  there  is  a general  practice  of  overcharging  small  dealers. 
While  these  specialized  companies  are  supposed  to  select  busi- 


5 


ness  and  therefore  to  show  a better  loss  ratio  than  the  Board 
companies  can  obtain,  it  is  still  a fact  that  the  rates  upon  this 
class  can  be  reduced  25  per  cent  and  show  a profit  for  the  aver- 
age quality  of  business  handled  by  the  Board  companies. 

The  Chicago  rates  established  by  the  Dean  Schedule  were 
the  climax  of  a series  of  increases  beginning  with  February, 
1894. 

UNDERLYING  CAUSES  OF  THESE  OPPRESSIVE 
CONDITIONS. 

The  why  and  wherefore  for  the  existence  of  these  unjust 
discriminations  can  best  be  understood  by  a consideration  of 
the  organizations  and  combines  existing  between  the  fire  insur- 
ance companies  and  officials.  It  appears  that  practically  all 
the  stock  fire  insurance  companies  doing  business  in  this  state 
have  found  it  to  their  great  advantage  to  form  various  inter- 
locking organizations,  through  which  they  work  jointly  in  the 
adoption  and  enforcement  of  certain  insurance  systems, 
methods  of  operation,  rate-making  schemes  and  agency  dis- 
cipline. In  fact,  every  person  engaged  in  the  business  from  the 
heads  of  companies  to  local  agents  is  either  persuaded  or 
drafted  into  some  insurance  organization,  and  stock  fire  insur- 
ance is  effected  and  applied  through  these  bodies.  I now  de- 
sire to  describe  briefly  the  National  Board  of  Fire  Underwriters, 
the  Chicago  Board  of  Underwriters,  the  Western  Insurance 
Bureau,  and  the  Union,  commonly  known  as  the  Western  Union, 
these  being  the  most  powerful  of  such  organizations  in  Illinois. 

THE  NATIONAL  BOARD  OF  FIRE  UNDERWRITERS. 

The  National  Board  of  Fire  Underwriters  is  an  organiza- 
tion composed  of  one  hundred  and  twenty-eight  stock  fire  in- 
surance companies  operating  throughout  the  United  States, 
which  companies  control  more  than  85  per  cent  of  the  entire 
stock  fire  insurance  business  of  this  country.  In  the  earlier 
years  of  its  existence,  this  Board  attempted  to  regulate  rates 
and  commissions,  but  this  function  has  been  abandoned.  It  is 
the  statistical  bureau,  and  the  representative  of  the  combined 
stock  fire  interests.  It  is  the  central  and  controlling  body  with 
whom  all  must  confer  on  questions  of  public  policy. 

At  the  request  of  the  Fire  Committee  of  the  National  Con- 


G 


vention  of  Insurance  Commissioners,  made  some  months  ago, 
the  National  Board  appointed  a committee  to  assist  the  Com- 
missioners’ Fire  Committee  in  correcting  the  over-charges,  in- 
equalities and  other  evils  existing  in  the  fire  insurance  business. 
While  this  Board  Committee  is  equipped  with  every  possible 
advantage  that  could  be  useful  to  such  a body,  yet  it  presented 
a report  to  the  Fire  Committee  of  the  National  Convention  on 
the  14th  of  April,  1914,  which  was  an  absolute  confession  of 
either  its  entire  inefficiency  or  lack  of  good  faith  in  carrying 
out  irs  undertaking  and  purposes.  This  sterile  report  was  not 
received  with  favor  by  the  Commissioners’  Fire  Committee, 
and  the  ‘‘Board”  Committee  was  requested  to  make  a further 
report.  In  compliance  with  this  last  request,  the  “Board” 
Committee  made  another  report,  but  their  only  promised  relief 
is  expressed  in  the  following  words : 

“Knowing  the  deep  interest  felt  fin  the  subject  of 
rate-making  by  the  various  heads  of  insurance  depart- 
ments, it  gives  us  pleasure  to  assure  you  that  the  sub- 
ject will  be  persistently  followed^  until  a conclusion 
has  been  reached — either  that  rate-making,  from 
actual  underwriting  experience,  is  impracticable,  or 
that  the  outlines  of  a plan  have  been  agreed  upon  from 
which  we  may  confidently  expect  eventual  success.” 

It  is  obvious  when  this  committee,  representing  an  organ- 
ization controlling  more  than  85  per  cent  of  the  entire  stock 
fire  insurance  business  of  the  country,  does  not  give  any  better 
assurance  of  assistance  than  indicated  in  this  report,  that  this 
organization  cannot  be  relied  upon  to  voluntarily  grant  relief 
or  provide  a remedy  for  existing  oppressive  conditions.  It  is 
a settled  fact,  then,  that  this  relief  must  come  from  affirmative 
action  upon  the  part  of  the  State  of  Illinois.  It  is  further  ap- 
parent that  no  relief  is  in  sight,  by  means  of  the  work  of  this 
“Board”  Committee,  from  a proclamation  made  by  it  before 
the  Insurance  Commissioners’  Convention  to  the  effect  that  all 
past  experience  of  the  fire  insurance  companies  is  worthless  in 
rate-making,  and  that  this  committee  would  now  have  to  begin 
to  accumulate  experience  upon  which  rates  might,  at  some  time 
in  the  distant  future,  be  based. 

This  position  is  remarkably  inconsistent  with  that  assumed 
by  the  companies  heretofore.  In  all  past  legislative  investiga- 


7 


tions  of  fire  conditions,  conducted  by  the  various  states,  fire  ex- 
perts of  national  reputation  have  invariably  been  produced  by 
the  companies.  Their  testimony  ever  consisted  of  voluminous 
compilations  of  ‘‘results  of  experience,”  presented  for  the  sole 
purpose  of  proving  and  sustaining  the  companies’  contentions. 
In  fact,  the  position  of  the  companies  as  to  rates  has  always 
been  based  upon  “Experience.” 

Two  propositions  persistently  maintained  by  the  “Board” 
Committee,  first,  that  no  experience  except  that  coupled  with 
individual  company  management  could  be  relied  upon  as  of  any 
value ; and,  second,  that  past  experience  is  worthless  in  provid- 
ing for  the  future,  were  considered  and  passed  upon  by  the 
Supreme  Court  of  the  United  States  in  the  recent  case  of  the 
German  Alliance  Insurance  Company  of  New  York  v.  Ike 
Lewis,  Superintendent  of  Insurance  of  the  State  of  Kansas,  the 
decision  in  which  was  announced  on  the  20th  day  of  April,  1914. 
Regarding  the  first  proposition,  the  complainant  company  set 
up  in  its  Bill  that  this  Insurance  Superintendent : 

“Could  not  have  the  requisite  technical  and 
mathematical  training  to  determine  whether  a basis 
rate  or  an  actual  rate  as  applied  to  any  particular  risk 
was  or  was  not  reasonable.” 

Regarding  this  contention,  the  Court  said: 

“It  would  indeed  be  a strained  contention  that  the 
government  could  not  avail  itself,  in  the  exercise  of 
power  it  might  deem  wise  to  exert,  of  the  skill  and 
knowledge  possessed  by  the  world.” 

Regarding  the  second  proposition,  the  same  position  was 
taken  by  the  company  in  this  suit, — that  past  experience  in  fire 
insurance  is  of  no  value,  and  the  Court  aptly  states : 

“The  Bill  asserts  the  contrary.  It  in  effect  admits 
that  there  can  be  standards  and  classifications  of  risks, 
determined  by  the  law  of  averages.  Indeed,  it  is  a 
matter  of  common  knowledge  that  rates  are  fixed  and 
accommodated  to  those  standards  and  classifications  in 
pre-arranged  schedules,  and,  granted  the  rates  may  be 
varied  in  particular  instances,  they  are  sufficiently 
definite  and  applicable  as  a general  and  practically 
constant  rule.” 

This  decision  by  the  highest  court  of  the  nation  fully  sus- 
tains the  right  of  any  state  to  regulate  the  rates  charged  by 


8 


fire  insurance  companies.  The  decision  is  comprehensive  and 
very  important,  and  establishes  a principle  which  all  states  will 
sooner  or  later  follow  in  dealing  with  the  business  of  fire  in- 
surance. 

THE  CHICAGO  BOARD  OF  UNDERWRITERS. 

The  Chicago  Board  of  Underwriters  is  a corporation  chart- 
ered in  1874  by  a special  act  of  the  legislature  of  this  state. 
This  Board  has  usurped  entire  jurisdiction  over  the  stock  fire 
insurance  business  in  Cook  County,  and  exercises  enormous 
powers  which  it  does  not  legally  possess-.  It  establishes  tariffs 
and  publishes  rates,  which  are  mandatory  upon  its  members. 
By  the  operation  of  the  so-called  ethical  rules,  and  strict  es- 
tablished rules  of  this  Board,  the  result  is  a powerful  combina- 
tion for  fixing  rates,  preventing  competition,  and  in  restraint  of 
trade.  The  membership  of  this  Board  is  so  interwoven  as  to 
unite  companies,  agents  and  brokers  in  such  a manner  as  to 
make  competition  by  non-board  companies  in  Cook  County  al- 
most impossible,  and  results  in  giving  the  Board  entire  control 
of  the  stock  fire  insurance  business  in  Cook  County,  rendering 
relief  to  the  general  public  by  individual  effort  a hopeless  un- 
dertaking. 

While  the  expressed  purposes  set  forth  in  the  charter  of 
this  corporation  are  such  as  might  imply  public  good,  and  some 
of  the  purposes  of  this  Board  in  fact  do  operate  for  the  public 
good,  yet  its  grasp  upon  the  entire  stock  fire  insurance  business 
in  Cook  County  is  of  such  a character  that  its  resultant  opera- 
tions are  manifestly  injurious  to  the  insuring  public ; causing 
inequitable  and  excessive  fire  insurance  rates. 

THE  ‘‘UNION’’  AND  THE  “ILLINOIS  INSPECTION 
BUREAU.^’ 

Illinois  rates,  outside  of  Cook  County,  are  under  the  con- 
trol of  a fire  insurance  organization  composed  of  companies 
which  are  members  of  the  National  Board,  called  the  Union,  also 
known  as  the  Western  Union.  By  an  arrangement  with  the 
Western  Insurance  Bureau,  a kindred  organization  of  compan- 
ies not  belonging  to  the  National  Board,  all  rating  functions  are 
under  the  jurisdiction  of  the  Union.  It  is  contended,  however, 
by  the  companies  that  the  services  of  an  independent  rating 


9 


bureau,  the  Illinois  Inspection  Bureau,  enter  into  down-state 
rate-making,  but  this  is  a subterfuge  and  so  recognized  by  all 
persons  acquainted  with  the  inner  workings  of  the  insurance 
combine.  The  Union  is  unlike  the  Chicago  Board  of  Under- 
writers in  its  organization,  but  somewhat  the  same  in  its  re- 
sultant operations,  and  affects  the  down-state  in  a way  very 
similar  to  that  produced  in  Cook  County  by  the  Chicago  Board 
of  Underwriters,  although  perhaps  to  a lesser  degree. 

The  power  of  the  Illinois  Inspection  Bureau  in  regard  to 
rates  is  unlimited.  Thus,  the  companies  composing  the  Union 
and  the  Bureau,  controlling  over  90  per  cent  of  the  business, 
are  able  to  arbitrarily  fix  the  price  of  insurance  without  appeal, 
and  Illinois  citizens  can  either  pay  the  price  demanded  or  go 
without  insurance.  However,  commercial  conditions  are  such 
that  fire  insurance  is  necessary. in  many  cases  in  order  to  obtain 
credit.  There  never  has  been  a time  when  any  person,  com- 
pany or  combination  could  safely  be  trusted  with  the  power  to 
arbitrarily  fix  the  i)rice  of  anything  which  they  practically  con- 
trol. Neither  my  department  nor  any  other  of  the  State  govern- 
ment has  any  control  or  authority  over  fire  insurance,  and, 
under  our  present  laws,  we  are  helpless  to  protect  our  citizens 
from,  overcharges. 

MEANS  FOR  OBTAINING  RELIEF. 

The  result  of  my  investigation  shows  clearly  that  Illinois 
is  entitled  to  immediate  relief  against  burdensome  fire  insur- 
ance conditions,  and  I have  discovered  nothing  that  forecasts 
voluntary  concessions  upon  the  part  of  the  companies,  or  relief 
through  the  medium  of  existing  insurance  organizations.  I 
am  of  the  opinion  that,  in  order  to  obtain  this  relief,  it  is  neces- 
sary that  affirmative  action  be  taken  by  this  Department  against 
the  Chicago  Board  of  Underwriters,  The  Union,  The  Western 
Insurance  Bureau,  The  Illinois  Inspection  Bureau,  and  such 
other  like  organizations  as  may  be  operating  in  violation  of  the 
law. 

The  courts  of  this  state  have  repeatedly  held  that  a combi- 
nation preventing  competition  or  restraining  trade  is  illegal, 
and  detrimental  to  the  public  welfare;  and  they  have  also 
specifically  held  that  a combination  or  agreement  to  fix  insur- 
ance rates  is  unla  wful ; that  the  business  of  insurance  is  a pub- 


10 


lie  necessity  and  stamped  with  a public  interest.  I am  satisfied 
that  the  operations  of  these  organizations  are  in  violation  of 
the,  laws  of  this  state,  and  unless  these  organizations  shall  re- 
form their  organized  bodies,  including  their  constitutions  and 
by-laws,  ‘‘ethical”  rules  and  “curb-stone”  understandings,  in 
such  a manner  as  not  to  be  in  violation  of  our  laws,  anti-trust 
suits  should  at  once  be  brought  against  them. 

REDUCTIONS  OF  PREMIUMS. 

Comparison  with  rates  charged  in  other  states,  similarly 
situated,  shows  that  stock  fire  insurance  companies  in  this  state 
should  at  once  grant  an  immediate  reduction  in  premiums, 
which  would  amount  to  the  following  totals : 

Chicago. 

Dwellings  •....$  650,000 

Dean  Schedule  Risks  750,000 

Sprinklered  Risks  50,000 

Total $ 1,450,000 

Illinois,  Outside  of  Chicago. 

Dwellings  "...$350,000 

Dean  Schedule  Risks  600,000  950,000 

Thus,,  the  total  amount  of  immediate  re- 
duction in  premiums  recommended  for. 
the  entire  State  is  . '. $ 2,400,000~ 

The  reduced  rates  herein  asked  are  only  for  temporary  re- 
lief, but  should  continue  while  the  state  is  being  re-rated  upon 
a non-discriminatory,  equitable  and  scientific  basis.  As  the  re- 
rating is  completed,  further  reductions  will  follow.  By  this 
plan,  millions  of  dollars  will  be  saved  annually  to  fire  insurance 
purchasers  in  the  state,  without  injuring  the  stability  of  stock 
fire  insurance  companies. 

It  is  well  known  that,  when  a state  demands  a premium  re- 
duction, the  organizations  controlling  the  fire  insurance  busi- 
ness at  once  insist  that  if  any  reduction  is  granted  it  must  be 
taken  from  the  agents’  commissions.  The  shifting  of  this  bur- 
den to  the  agents  is  not  done  in  good  faith,  but  to  arouse  them 
against  any  premium  reduction.  For  example,  in  the  State  of 
Illinois  there  are  about  thirty  thousand  licenses  issued  annually 
to  fire  insurance  agents.  While  an  agent  may  represent  more 


11 


than  one  company,  yet  the  number  of  licenses  issued  gives  an 
idea  of  the  army  of  agents  that  is  distributed  throughout  the 
state;  and  if  this  premium  reduction  should  be  taken  from  their 
commissions,  it  would  mean  that  these  agents,  through  a spirit 
of  self  defense,  would  be  aroused  to  uphold  the  premium  rates 
now  in  force.  It  is  true  that  the  commissions  of  fire  insurance 
agents  may  in  the  future  be  properly  reduced,  but  this  reduc- 
tion must  come  concurrently  with  the  enactment  of  an  agents’ 
qualification  law,  which  will  require  fire  insurance  agents  to 
have  a professional  knowledge,  which  the  importance  of  the 
business  urgently  demands. 

ATTITUDE  OF  COMPANIES  TOWARD  STATE 
REGULATION. 

The  persistent  refusal  of  stock  fire  insurance  companies 
and  organizations  to  voluntarily  grant  concessions  to  the  in-, 
suring  public  seems  to  me  to  be,  absolutely  indefensible,  and 
the  concerted  resistance  of  these  companies  to  the  enforcement 
of  laws  enacted  in  Missouri,  Kentucky  and  Kansas,  indicates 
the  extent  of  the  ‘‘mutual  understanding”  existing  between 
all  companies  on  public  questions,  and  shows  the  firmness  with 
which  they  will  resist  all  public  demands  for  relief,  or  any  at- 
tempt upon  the  part  of  the  state  tn  control  rate-making. 

Stock  fire  insurance  companies  have  for  the  past  half  cen- 
tury, without  right  or  title,  assumed  to  possess  a vested  right 
in  this  country,  to  manage,  own  and  control  the  fire  insurance 
business,  and,  'with  a spirit  of  hypocritical  martyrdom,  chal- 
lenge the  right  of  the  state  and  the  public  to  be  heard  on  ques- 
tions of  rate^making,  and  deny  their  right  to  investigate  insur- 
ance systems  and  methods.  The  recent  decision  of  the  United 
States  Supreme  Court  referred  to  above  conclusively  establishes 
the  right  and  power  of  the  state  to  interfere  in  behalf  of  its 
citizens  and  regulate  the  fire  insurance  business,  and  entirely 
disposes  of  this  “vested  right”  assumption. 

The  notorious  practices  of  such  companies  in  resisting  pro- 
gressive laws  and  methods  of  regulation  of  the  fire  industry  are 
exemplified  by  the  attitude  of  the  companies  in  the  Kentucky 
situation.  In  a recent  circular  issued  by  the  Fire  Board  of  the 
State  of  Kentucky,  the  following  statement  is  made : 


12 


“Inasmuch  as  the  law  regulating  fire  insurance 
companies  in  Kentucky  has  caused  so  much  discussion 
and  because  the  insurance  companies  through  a joint 
agency  in  Chicago,  their  “Publicity  Bureau,”  owned 
jointly  by  the  various  companies  and  officered  by  offi- 
cials of  the  companies,  are  fiooding  the  state  with  un- 
signed printed  articles  regarding  the  situation  which 
are  far  fetched,  distorted  and  misleading  * * * * 

* * * * companies  through  misrepresenta- 

tions have  induced  their  local  agents  to  believe,  and 
through  them  the  insuring  public  to  likewise  believe, 
that  the  condition  now  prevailing  in  Kentucky  has 
been  brought  about  by  some  drastic  action  upon  the 
part  of  the  Board,  when,  in  fact,  no  order  of  the  Board 
has  ewer  been  put  into  effect  that  was  not  agreed  to  by 
the  companies  before  its  promulgation,  so  that  the  con- 
dition in  Kentucky  is  chargeable  alone  to  the  concerted 
action  of  the  insurance  companies  instead  of  the 
Board.” 

This  statement  further  shows  that  in  Kentucky,  where  con- 
ditions for  underwriting  profit  are  much  less  favorable  than 
in  Illinois,  the  lowest  earnings  of  any  period  have  been  twelve 
per  cent  upon  the  capital  stock  of  the  companies,  with  an 
average  of  sixteen  per  cent  for  the  past  twenty  years.  It  is  a 
well  known  fact  that  in  addition  to  the  underwriting  profit 
reported  by  the  stock  companies,  there  are. also  large  interest 
earnings  on  premium  deposits  and  investments,  the  amount  ^of 
which  is  not  reported  as  a part  of  their  profits. 

COERCION  CANNOT  CONTROL  ILLINOIS. 

It  has  been  the  practice  of  stock  companies,  when  legisla- 
tion is  adopted  regulating  fire  insurance  rates,  to  attempt  to 
coerce  the  state  by  a concerted  withdrawal.  While  I do  not 
now  ask  for  legislation,  yet  should  legislation  be  necessary  to 
remedy  existing  evils,  I do  not  anticipate  any  such  action  by 
the  stock  companies  doing  business  in  Illinois.  The  amount 
paid  for  fire  insurance  in  this  state  during  the  period  of  one 
year  is  almost  equal  to  the  combined  premiums  for  the  same 
period  of  the  states  of  Missouri,  Kansas,  Kentucky  and  Texas, 
wher.e  such  tactics  have  been  adopted  in  resisting  state  regula- 
tion. However,  should  they,  withdraw  from  this  state,  it  will 
create  but  little  disturbance  in  the  Illinois  business.  This  im- 
mense volume  of  insurance  constitutes  a field  of  operation  of 


13 


such  magnitude  that  Illinois  alone  can,  fwith  reasonable  safety, 
through  domestic  institutions,  furnish  its  own  insurance.  Our 
diversified  systems  of  insurance,  backed  and  encouraged  by 
Illinois  capital  and  citizens,  would  soon  supplant  the  withdraw- 
ing companies  with  safe  insurance  institutions.  By  subscrib- 
ing a small  per  cent  of  the  monthly  premium  collections  to  a 
state  conflagration  fund,  all  Illinois*  insurance  institutions 
would  soon  reach  a point  where  their  safety  could  not  be  ques- 
tioned. 

We  are  so  situated  that  we  do  not  have  the  high  winds  of 
some  states;  we  are  outside  the  earthquake  zone;  free  from 
forest  fires,  and  many  other  extra  hazards  that  increase  fire 
losses  in  other  states.  The  largest  city  of  this  state  is  given, 
by  the  National  Board  of  Fire  Underwriters,  the  highest  rank 
in  its  fire  protection. 

In  order  to  meet  commercial  requirements  and  economic 
necessities,  fire  insurance  has  become  practically  compulsory. 
Consequently,  the  refusal  of  stock  fire  insurance  companies  to 
furnish  this  protection,  by  their  concerted  withdrawal,  would 
create  a duty  upon  the  part  of  the  state  to  conserve  the  welfare 
of  its  citizens,  and  fully  justify  the  State  of  Illinois  in  adminis- 
tering a State  Fire  Insurance  Fund. 

I am  ever  mindful  that  fire  insurance,  like  all  insurance, 
is  subject  to  certain  fixed  and  inherent  laws  controlling  the 
cost  of  insurance,  which  cannot  be  neutralized  by  state  legisla- 
tion. This  normal  cost  cannot  be  disregarded  by  insurance  insti- 
tutions and  solvency  maintained,  and,  in  applying  a remedy  for 
the  many  ills  flowing  from  present  conditions,  there  should  not 
be  brought  about  a greater  evil, — that  of  forcing  upon  the  pub- 
lic insolvent  insurance  institutions.  I am  also  ever  mindful 
that  fire  insurance  companies  and  systems  should  not  be  dis- 
turbed by  needless  investigations  and  prosecutions,  and  that 
no  action  should  be  taken  by  this  Department  unless  such  ac- 
tion is  fully  justified  and  the  relief  sought  is  imperatively  de- 
manded. 

FIRE  INSURANCE  PROFITS. 

I am  thoroughly  convinced,  however,  from  the  investiga- 
tion I have  made  and  evidence  I have  accumulated,  that  the 
underwriting  profit  in  fire  insurance  and  earnings  in  Illinois 


14 


accruing  to  the  stock  fire  insurance  companies  is  large,  being 
in  excess  of  that  of  many  other  states ; and  that  the  premium 
reduction  I am  asking  can  be  granted  without  in  the  least  dis- 
turbing the  stability  of  this  branch  of  insurance.  Also,  if  a 
proper  premium  reduction  is  not  voluntarily  made  and  the  re- 
lief granted  as  herein  outlined,  this  Department  should  take 
such  steps  in  behalf  of  the  insuring  public  as  conditions  demand. 

During  the  last  year,  in  the  United  States,  thirty-nine 
stock  fire  insurance  companies  surrendered  their  charters  and 
went  out  of  business.  This  cessation,  however,  cannot  be 
charged  to  a lack  of  sufficient  underwriting  profit.  A few  com- 
panies were  driven  from  business  by  competition;  a small  per- 
centage failed  from  imperfect  management;  and  the  remaining 
ones  were  re-insured  or  absorbed  by  larger  companies  through 
the  so-called  ‘‘Underwriters’  Agency”  scheme.  The  purpose 
of  the  larger  fire  insurance  companies  seems  to  be  to  cro  wd  out 
the  smaller  ones,  and  to  discourage  new  capital  from  entering 
the  business,  which  will  ultimately  result  in  the  centralization 
of  the  business  in  the  hands  of  a few  companies.  At  the  pres- 
ent time,  less  than  one-fourth  of  the  stock  fire  insurance  com- 
panies do  more  than  three-fourths  of  all  the  stock  fire  business. 

“UNDERWRITERS’  AGENCY”  SCHEME. 

Another  practice  adopted  by  stock  fire  insurance  companies, 
that  should  cease  at  once,  is  the  issuance  of  what  is  known  as 
“Underwriters”  policies.  The  “Underwriters’  Agencies”  is- 
suing such  policies  are  simply  fictitious  concerns  created  by  in- 
dividual companies,  or  two  or  more  companies  acting  jointly, 
for  business-getting  purposes  only.  The  policies'  themselves 
are  deceptive,  used  as  make-shifts,  and  reflect  a marked  dis- 
regard for  legitimate  business  methods  by  the  companies  par- 
ticipating in  the  practice. 

CONCLUSION. 

When  company  supporters  are  confronted  with  facts  re- 
lating to  their  business,  they  immediately  fall  back,  for  lack 
of  better  argument,  on  a stock  of  exceedingly  elastic  and  am- 
biguous technical  phrases,  such  as  “National  Experience,” 
“Conflagration  Hazard,”  “Soundness  of  Insurance,”  “Moral 
Hazard,”  “Inspection  Service,”  etc.  Each  of  these  expres- 


15 


sions  means  something  in  fire  insurance,  and  a definite  some- 
thing, but  they  should  not  be  made  to  mean  anything  and 
everything  and  used  as  they  are  as  a means  of  mystifying 
listeners  and  a justification  for  excessive  premium  rates. 

The  time  has  arrived  when  all  fire  insurance  companies 
must  make  the  fire  insurance  business  of  this  state  an  open 
book.  They  must  take  the  public  into  their  confidence  in  all 
operations,  and  thus  secure  public  co-operation  in  all  future 
fire  rate-making,  which  re-rating  should  be  done  under  the  di- 
rect supervision  of  a body  representing  the  People  of  the  State. 
This  public  co-operation  will  likewise  bring  new  and  improved 
methods  of  fire  prevention  which  will  result  to  the  great  perma- 
nent benefit  of  both  the  insuring  public  and  all  insurance  insti- 
tutions. 

The  excessive  rates  and  unjust  discriminations  imposed  by 
the  fire  insurance  companies  on  citizens  of  Illinois  through  the 
medium  of  unlawful  “combines”  and  organizations,  with  their 
accompanying  train  of  evils,  should  be  forever  eliminated.  The 
companies  should  be  required  to  correct  these  injustices  and 
abandon  their  unlawful  practices.  If  they  will  not  do  so  volun- 
tarily, then  every  resource  of  the  executive,  the  judicial  and 
legislative  branch  of  the  state  government  should  be  invoked 
to  remove  these  evils.  It  would  be  a confession  of  weakness 
to  fail  to  do  this,  particularly  since  the  late  decision  of  the 
United  States  Supreme  Court  has  invalidated  the  companies’ 
claim  that  fire  insurance  rates  were  not  subject  to  regulation 
by  the  state. 

Respectfully  submitted, 

RUFUS  M.  POTTS, 

Insurance  Superintendent. 


May  6,  1914. 


I 


